Universal Display Jumps 15%: Street Breathes Relief on Q1 Beat

By Tiernan Ray

Shares of organic light-emitting diode technology maker Universal Display (OLED) are up $3.78, or over 15%, at $28.65, after the company yesterday beat Q1 revenue and profit expectations, and said it is more likely now to hit the high end of a previously forecast range for this year’s sales.

Analysts today, both bull and bear, wrote that the results should “stem the tide” of fear around the company’s position in the OLED business, following one fresh concern on Monday about television set production. Estimates are being tweaked up or down here and there, as are price targets.

Bullish!

James Ricchiuti, Needham & Co.: Reiterates a Buy rating, and a $43 price target. “UDC, which had been guiding to a back-end loaded year, turned in a superb Q1 report, with rev and EPS well above Street expectations. The upside was driven by robust 177% y/o/y growth in materials revenue, which was well above expectations. Mgmt now sees full-year revenues at the high end of its prior $190M-$205M guidance, representing ~40% growth. A higher tax rate will hold back EPS, although we now expect operating income to be up 85% in 2014 versus our prior forecast of 69% growth [...] UDC, which had been guiding to a back-end loaded year, turned in a superb Q1 report, with rev and EPS well above Street expectations. The upside was driven by robust 177% y/o/y growth in materials revenue, which was well above expectations. Mgmt now sees full-year revenues at the high end of its prior $190M-$205M guidance, representing ~40% growth. A higher tax rate will hold back EPS, although we now expect operating income to be up 85% in 2014 versus our prior forecast of 69% growth.” Ricchiuti raised his 2014 revenue estimate to $205 million from $200 million, while cutting his EPS estimate to 93 cents from $1.

Brian Lee, Goldman Sachs: Reiterates a Buy rating, and trims his price target to $42 from $44. “Revenue upside was driven wholly by materials, which appeared to buck typical seasonality, up 38% qoq on new product launches and better mix – which also drove materials gross margin +230bp qoq to 72%, its highest level in a year [...] While the stock has come under pressure in recent months due to concerns around share loss and market growth – and these concerns weren’t fully laid to rest in our view – OLED delivered unexpected upside in 1Q14 that we expect will stem the tide in the near-term, especially given evidence of incremental growth drivers from the quarter: (1) materials revenue of $35mn, which hit a quarterly record with growth in both red and green, including next-gen emitters at higher ASPs (esp. in red); (2) disclosure of an evaluation agreement with BOE – a Tier-1 Chinese display maker – that could be a precursor to a materials supply agreement; and (3) an increasingly confident management tone on the potential for contribution from non-traditional applications, including wearables where we believe flexible displays for watches could see higher traction in 2H14. A key upside catalyst remains a long-term deal with LG – a key customer where we believe visibility is likely to improve in 2H14. This is not reflected in the price today in our view, with the stock (ex-$6 of cash) at 17X 2014 EPS.” Lee raised this year’s estimates to $216 million from a prior $212.4 million, but cut his EPS estimate $1.12 from a prior $1.21.

Andrew Uerkwitz, Oppenheimer & Co.: Reiterates an Outperform rating, but cuts his price target to $30 from $44. “Mgmt also reiterated full-year guidance with a bias towards the higher end. For now, this should allay fears regarding competition for green host materials and Samsung’s commitment to OLED technology. Green host materials for the quarter were $12.4M, up 33% sequentially. Management did acknowledge competitive risks to its host business as well as highlight its own advantages—its proprietary solutions work better with its emitter material while being price competitive. Mgmt remains confident in its position and its ability to continue to grow. We are cautiously optimistic, but do rerate the valuation on investor concerns [...] The next two quarters should give us a good idea of where Universal Display stands in the middle of the noise. We should get confirmation of how quick the mobile penetration of OLED as several new devices are potentially launched over the summer. We could also get confirmation that LG Display’s Gen8 plant is finished and what utilization rates it may have in the medium term. We could also get clarity regarding the level of competitive threat UDC faces in host material.” Uerkwitz trimmed his EPS this year to 91 cents from 94 cents.

Hendi Susanto, Gabelli & Co.: Reiterates a Buy rating. “Strong sales of green host materials and management’s confidence on delivering strong green host materials alleviate our concern that Cheil Industries has or will become a major supplier of green host materials to Samsung. We want to reiterate our view that the market competition in OLED materials includes characteristics such as the nature of continuous long-term competition and potential barriers of entries in the form of intellectual property, R&D, and process know-how. Universal Display management expects green host material sales to be strong in 2014 [...] New red emitter and green emitter material sales carried higher ASP in the first quarter and are based on tiervolume pricing breaks. Samsung and LG are planning to invest in additional capacity. LG reaffirmed plan to start production of its newly converted Gen 8 OLED line in the second-half of 2014 with an initial monthly capacity of 20,000 substrates. Chinese panel manufacturers have announced OLED fab plans and activities in Japan and Taiwan remain strong.”

Robert Stone, Cowen & Co.: Reiterates an Outperform rating, and a $45 price target. “The 33% Q/Q growth in green host sales gives no indication that Samsung has switched suppliers and suggests that UDC’s materials are used in the new stack recipe for the Samsung Galaxy S5. UDC has always acknowledged that host materials are a competitive segment and lower gross margin compared to emitters. However, it was designed in because of better performance. The materials are patented, so as long as it keeps a lead in price/performance, it should keep winning designs [...] Better materials margins lift GM about 110 b.p. Were it not for the higher tax rate (41% vs. prior 30%), 2014E EPS would have been raised to $1.09. We kept our 30% estimated tax rate in 2015-17E as the Subpart F impact is for 2014 only, the R&D credit is likely to be reinstated, and UDC Ireland should contribute to a lower rate overall.” Stone raised his 2014 estimates to $205.8 million from $200 million previously, while trimming his EPS estimate for the year to 92 cents from a prior $1.

Bearish!

Craig Irwin, Wedbush Securities: Reiterates a Neutral rating, and a $34 price target. “Green emitter for Samsung was the primary driver of upside, up 48% Q/Q to $17.6m, compared to $11.6m in 4Q13, and $4.6m in 1Q13. It appears deposition rates at Samsung are higher than we previously thought, although we are cautious these could come down over time with Samsung gaining experience with actual decay rate of emitters used in commercial production, as they likely started using a conservative initial assumption for their stack formulas. UDC indicated the company is positioned to achieve revenue near the high end of the $190m-$205m 2014 guidance range. We see SD visibility rising. Adjusting estimates for the quarter and incorporating more conservative 2015 OLED TV assumptions. We remove $8m in SD revenue for 2015 TVs, and are cautious about the sales potential for LG Display’s planned TV production. Our target reflects a 17.5x multiple on 2015E EPS (vs. a 30x multiple on 2014, previously) which we believe is fair given UDC’s potential for impressive revenue and EPS growth balanced by competitive and market risks. The lower multiple in our updated valuation reflects a more limited longer-term trajectory at Samsung without TVs [...] Growth visibility has been reduced by disruption of a generally linear relationship between OLED production and Chemicals demand at Samsung Display. An impressive ramp in green emitter sales since 2Q13 has been positive, but linearity is still a question.” Irwin raised his 2014 estimates to $208.9 million and $1.20 per share from a prior $206.5 million and $1.15.

Jonathan Dorsheimer, Canaccord Genuity: Reiterates a Hold rating, but raises his price target to $28.50 from $24.50. “Going into the quarter we harbored concerns about second sourcing, push outs at Samsung in both flexible and TV and potentially more efficient use of materials that may affect the ’14 guide – UDC has addressed our concerns by raising guidance. Given the beat, especially with respect to materials sales, our concerns appear overblown in the near-term. However, we continue to believe that these may still pose medium-term risks to the story. Longer-term we continue to harbor concerns about UDC’s economics when its key IP begins to expire, even though we remain bullish on the overall OLED opportunity – especially in mobile.” Dorsheimer raised his 2014 estimates to $200.7 million and 88 cents per share from a prior $180 million and 80 cents per share.

John Bright, Avondale Partners: Reiterates a Market Perform rating and a $35 price target. “The quarter beat relative to consensus was largely driven by Material sales (up ~170% y/y) with impressive growth in Host (up ~243% y/y) and Emitter (up ~150% y/y). The sales are directly attributable to continued growth of the OLED industry, notably the recent launch of a flagship OLED smartphone and customers’ new production activity. Based on the current visibility and outlook, OLED believes to reach the high end of its C14 revenue guidance ($190-205m). While the OLED industry gained some traction with a commitment toward larger generation OLED TV investment (LG, Samsung) and LG’s ramp in its 8G OLED line (2H14 initial capacity set ~20,000 plates per month), we continue to believe new products (OLED TVs, tablets, smartwatches), increased penetration (mid-end smartphones, OLED display on iPhone?), new licensees, or new colors (blue) will be key to accelerating earnings. As such, we remain on the sidelines as we await signs UDC can grow its footprint in the OLED market beyond Samsung smartphones.” Bright raised his estimates for this year to $202.3 million and $1.43 per share from a prior $197.4 million and $1.38.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.